2014 (9) TMI 1272 - HC - Indian Laws

Seeking to restrain the respondent from invoking the letter terminating two Supply and Service Agreements - grievance relates to alleged breach of promise on part of the State where claimant has acted to his prejudice on basis of assurance or promise on the part of the State, but the agreement is short of a contract within the meaning of Article 299 of the Constitution - rights are purely contractual and claimant alleges breach by the State of a term of the contract. HELD THAT - The legal position which can be summarized would be that a bank guarantee is an independent contract between the bank and the beneficiary and disputes pertaining to bank guarantees have to be resolved de-hors the terms of the main contract between the parties or disputes relatable to the main contract between the parties. Where a bank guarantee is a conditional guarantee invocation thereof would have to be in strict conformity with the conditions on which the guarantee is issued. In such a case an injunction can be granted against payment under the bank guarantee if it is found that the condition upon which the guarantee was issued has not been complied with or met. But where the guarantee is unconditional and/or the bank has agreed to make payment without demur or protest, on the beneficiary invoking the bank guarantee the bank is obliged to honour the same for the reason like letters of credit, a bank guarantee if not honoured would cause irreparable damage to the trust in commerce and would deprive vital oxygen to the money supply and money flow in commerce and transaction which is necessary for economic growth. Disputes pertaining to the main contract cannot be considered by a court when a claim under a bank guarantee is made and the court would be precluded from embarking on an enquiry pertaining to the prima facie nature of the respective claim of the litigating parties relatable to the main dispute. The dispute between the parties to the underlying contract has to be decided at the civil forum i.e. a civil suit if there exists no arbitration clause in the contract or before the arbitral tribunal if there exists an arbitration clause in the contract. Pendency of arbitration proceedings is no consideration while deciding on the issue of grant of an interim injunction. That certain amounts have been recovered under running bills and have to be adjusted for is of no concern in matters relating to invocation of bank guarantee. That there are serious disputes on questions as to who committed the breach of the contract are no circumstances justifying granting an injunction pertaining to a bank guarantee. Plea of lack of good faith and/or enforcing the guarantee with an oblique purpose or that the bank guarantee is being invoked as a bargaining chip, a deterrent or in an abusive manner are all irrelevant and hence have to be ignored. There are only two well recognized exceptions to the rule against permitting payment under a bank guarantee. Contractual disputes cannot be projected by attempting to urge that the beneficiary under the bank guarantee is in default. Issues of fraud require pleadings to bring out a case of a fraud of an egregious nature and we do not find any brought out in the pleadings. The irretrievable injury or irretrievable injustice or special equity would mean a situation where the party at whose behest the bank guarantee is issued is rendered remediless. Appeal dismissed.

Issues Involved:
1. Termination of Supply and Service Agreements.
2. Invocation of Bank Guarantees.
3. Responsibility for obtaining necessary permissions and sanctions.
4. Extension of time for completion of works.
5. Allegations of fraud and special equity.
6. Applicability of Article 14 of the Constitution of India.
7. Grant of injunctions in the context of bank guarantees.

Issue-wise Detailed Analysis:

1. Termination of Supply and Service Agreements:
The court addressed the termination of two Supply and Service Agreements by the respondent. The appellant argued that the termination was premature and arbitrary, given that the contract completion date had been extended to October 2014. The court noted that the respondent had provided a notice to cure on May 09, 2014, and the appellant failed to remedy the breaches within the stipulated 14 days. The court found that the termination on May 30, 2014, was justified as the appellant had not shown any forward movement post the cure notice.

2. Invocation of Bank Guarantees:
The appellant sought an injunction to restrain the respondent from invoking eight bank guarantees. The court found that six of the guarantees were unconditional and thus enforceable. The court reiterated that bank guarantees are independent contracts and should be honored unless there is fraud of an egregious nature or irretrievable injustice. The appellant's claims did not meet these exceptions, and the court directed the payment of the amounts under the guarantees to the respondent.

3. Responsibility for Obtaining Necessary Permissions and Sanctions:
The original agreements placed the responsibility for obtaining permissions and sanctions on the respondent. However, the Supplementary Agreements dated May 10, 2010, shifted this responsibility to the appellant, including obtaining way leave clearances and necessary consents. The court found that the appellant had accepted this responsibility and was actively involved in negotiating compensation with landowners and preparing necessary documentation.

4. Extension of Time for Completion of Works:
The time for completing the works was extended thrice, with the final extension setting the completion date to October 31, 2014. The court noted that despite these extensions, the appellant failed to make significant progress. By January 2014, the appellant was lagging far behind the schedule, justifying the respondent's decision to terminate the contract before the extended deadline.

5. Allegations of Fraud and Special Equity:
The appellant alleged that the invocation of the guarantees was fraudulent and that special equities existed in their favor. The court held that the allegations of fraud were not substantiated and did not meet the standard of egregious fraud required to restrain the invocation of bank guarantees. The court also found no special equities that would justify an injunction, as the appellant's inability to perform was evident.

6. Applicability of Article 14 of the Constitution of India:
The court examined whether the respondent, being a joint venture with significant government shareholding, was an instrumentality of the State and thus subject to Article 14. The court concluded that the respondent did not qualify as an instrumentality of the State, as the majority controlling shares were held by private entities. Therefore, the principles of reasonableness and fairness under Article 14 did not apply to the respondent's actions.

7. Grant of Injunctions in the Context of Bank Guarantees:
The court reiterated the established legal principles that injunctions against the invocation of bank guarantees can only be granted in cases of egregious fraud or irretrievable injustice. The court found that the appellant's case did not meet these criteria. The court emphasized that disputes related to the main contract should be resolved separately and should not impact the enforceability of unconditional bank guarantees.

Conclusion:
The court dismissed the appeals, upheld the termination of the contracts, and allowed the invocation of the bank guarantees by the respondent. The court directed the payment of the amounts under the guarantees to the respondent and awarded costs against the appellant.

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